Game over for large takeovers

Pernod Ricard paid big money for Absolut – and upset the balance of power within the major spirits brands. But this was the last of the large drinks acquisitions, predicts Ron Emler

When it put Vin & Sprit up for sale, the Swedish government triggered a new round of consolidation in the wine and spirits sector. The fact that Pernod Ricard, Bacardi, Beam Global and (initially at least) Diageo all expressed interest shows they are all desperate to bolster their portfolios, not least in the growing emerging markets. More importantly, they don’t want their rivals to steal a march on them.
Even despite paying e5.626 billion (including debt) for the producer of Absolut, Pernod Ricard says it has “every intention of remaining a dynamic player in the consolidation of the wines and spirits industry”. That will have to wait a while, as it begins to pay down some of the £10bn of debt on its balance sheet.    
The heavy indebtedness prompts the question of whether Pernod Ricard overpaid for V&S. Patrick Ricard, the French group’s chairman and chief executive, says simply that the deal was only going to be available once and so that was the price he had to pay to win Absolut, which sells about 10.5 million cases a year. It is also worth bearing in mind that he persuaded bankers to lend him the money during the worst credit squeeze in living memory. They must believe the sums work.
Buying Absolut gives Pernod Ricard new impetus in the giant US market, not only because about half of Absolut’s sales come from America, but also because its volumes there are virtually triple those of Stolichnaya, the existing international vodka in Pernod Ricard’s portfolio. And the fact that the deal brings with it Cruzan rum is a big bonus because Havana Club, one of Pernod Ricard’s priority brands, is excluded from the US because it is produced in Cuba.
As part of its “local roots, global reach” philosophy, Pernod Ricard will leave much management control of Absolut with the existing Swedish team, but it will not reap full benefits from the deal for several years. This is because distribution of Absolut is undertaken in the US through a joint-venture company with Fortune Brands’ Beam Global subsidiary. Fortune has said it will not give up that deal until it expires in four years. That may be a negotiating position, and Pernod says it factored into its bid the probability that much of Absolut’s US profitability would remain with Beam for a few years.

Fortune was tipped to win Absolut simply because of its ties with Vin & Sprit (which owns 10% of the US group. That will now be sold.) The looming loss of some 5m cases of US sales leaves the American group with a large problem, not least that concerning product distribution outside the US. Absolut’s departure spells the end of the Maxxium consortium in its present form.
Losing Absolut would have been a heavy blow on its own, but Rémy Cointreau has already announced that it is pulling out of Maxxium next year. Pernod Ricard regards the price of removing Absolut from the consortium as negligible and will do so as soon as possible. That will leave just Fortune and Edrington, the owner of The Macallan and Famous Grouse Scotch brands, as members.
Edrington is not a viable takeover target because it is owned by a charitable trust, so the most likely  outcome is closer marketing and distribution links between the Scottish group and Fortune.
No doubt Fortune’s attentions are turning to Stolichnaya, the 3m-case vodka that had been distributed outside Russia by Pernod Ricard since the 2005 takeover of Allied Domecq. Pernod Ricard had been in  discussions with the Russian government about buying the brand but that is now impossible, not only because of the loss of face in Moscow, but also because international competition authorities would not allow Absolut and Stolichnaya to exist in the same stable despite their combined sales being dwarfed by those of Diageo’s Smirnoff.

Bacardi, Brown Forman and even Constellation will at least explore links with Stolichnaya but competition questions might cloud Bacardi’s interest because it already owns Grey Goose. The Federal Trade Commission in Washington is taking a very keen interest in Diageo’s deal to purchase Ketel One, which it wants to occupy a premium position beside Smirnoff in its portfolio. Similar concerns could be raised about Stolichnaya joining the same stable as Grey Goose. Meanwhile, Brown Forman has the Finlandia brand.

Future consolidation
For its own part, Pernod Ricard would still love to own a big Tequila brand – when it can afford it. Its debt mountain will be trimmed marginally because although it does not want to sell any brands, it knows it will be forced to. It has said Plymouth Gin will be sold and Campari has already expressed interest in the brand. Frïs vodka will also become available.
Diageo, meanwhile, will continue to augment its portfolio with niche brands wherever possible. In addition to Ketel One, so far this year it has bought Rosenblum Cellars in the US and signed a deal to distribute Zacapa Centario from Guatemala. Paul Walsh, Diageo’s chief executive, says he pulled out of the auction for Absolut not only because of probable competition problems but also because Ketel One offered better opportunities for brand development than Absolut.
Pernod Ricard’s takeover of V&S follows the major deals in which the French group joined Diageo to break up Seagram and then took over Allied Domecq with the aid of Fortune Brands. Might we see similar swoops in future?    
Some believe Rémy Cointreau might be vulnerable after exiting Maxxium. Its profitability has improved considerably and Champagne and Cognac are strong growth categories. But who might the buyer be? Diageo does not own either a Champagne or Cognac brand, but it holds 34% of Moët Hennessy and Walsh says he is very happy with that. Brown Forman, the world’s fourth largest spirits group, also lacks both categories but Beam Global owns Courvoisier. The prospects of a private equity takeover are not high either because Rémy’s existing management have undertaken most of the restructuring associated with such a deal and debt finance is at a premium. Even more telling is the fact that Rémy has significant family shareholders.

A link between Beam and Brown-Forman is improbable. Their roles in the US market are too large to avoid creating huge regulatory problems and neither would be willing to part with their respective iconic brands, Jim Beam and Jack Daniels.   
Which leaves Bacardi among the big players. The private group has expanded significantly beyond the eponymous white rum, taking into its portfolio Martini, Grey Goose, Dewar’s and Bombay Sapphire  among others. But to make a really big bid, Bacardi would have to either ask its family shareholders for cash or raise it through flotation. The listing of some shares on Wall Street has been mooted for some time, but the owning families cannot agree. The depressed state of the market makes such an event even more unlikely in the foreseeable future.
Absolut was the last iconic brand available to the major players. Now that it has fallen, we will still see the big players making deals, but unless the cost of debt falls substantially and both Brussels and Washington make U-turns on their competition policies, the days of the drinks mega takeovers are probably over… until the new rich of the East turn their attentions to owning Western wine and spirits brands as well as driving new consumption.

© db  May 2008